Johnna Montgomerie
As the Greek crisis unfolds it exposes key sites of financial power within contemporary capitalism. In particular the role that debt plays as a central feature of financialisation, which breeds economic fragility across the Europe.
Using moral economy as a lens makes visible how economic institutions operate based on norms that define rights and responsibilities; and, how these norms require legitimation based on the moral behaviours of key actors. The Greek financial crisis is important because it exposes the explicit moral economies of debt at work in contemporary economic governance strategies. Namely, how the moral sanctity of ‘you must repay your debts’ is only enforced by key actors (the Troika) in certain circumstances based on which types of institutions and types of debt were being governed.
The shifting moral economies of debt are the shared beliefs that underwrite the political power of finance within the European project, these norms coalesce to enforce the current elite consensus on forced Austerity. Using EP Thompson’s moral economy to frame political resistance to debt, we can see in the Greek context we see how resistance becomes response to debt negotiations. The events surrounding the referendum last summer show that moral responsibility for debt is a political space whereby the powerless contest the actions of elites based on claims of fairness.
These moments of rupture allow us to foment a wider cultural conversation about who is morally responsible for debt.
Debt and Financialisation
The centrality of debt to the financialisation can be seen clearly in the unquestioned moral economy of debt-based money creation by banks. Private Banks create credit money by issuing new debt contracts, approximately 90-95% of all money exists as debt deposits.
Debt-based money is made possible by the universal political support for the ‘you must repay your debts’ moral economy of finance. Credit means trust, a creditor and a borrower agree terms of repayment; therefore, the foundation of credit-money (fiat) systems is the cultural process of debt. We know from David Graeber there are many historical examples of different types of debt practices, each showing how morality materialises in debt relations. Therefore, the current moral imperative of ‘you must repay your debts’ is socially contingent, not historically fixed.
A key aspect of the moral economy of financialisation is to deliberately limit understandings of debt to a contractual relationship between borrower and lender. When today’s banks issue loans (and in doing so creating new money) they make an asset on their balance sheet, the revenue from this asset is the repayments made by debtors. Next, the bank that issued the loans bundles together all these debt deposit accounts and transfer them to an ‘offshore’ investment vehicle to be sliced and diced and sold-on in financial markets. This is the basic ‘originate and distribute model’ of financialised banking. What underpins all of this is the promise that debt repayments will be made.
The most recent debt crisis in 2008/9 was triggered when pools of financial assets could no longer be accurately valued because of rising default rates on US subprime mortgages, the inability this set off a firestorm that ripped through financial markets. Yes, banks can create assets (and money) at the stroke of a keyboard, but these assets are only made real by the revenues received as repayments. Risk of non-repayment (default) is at the heart of present-day financial fragility.
Greek Tragedy
The Greek financial crisis exposes the moral economies of financialisation as wrought with tensions. Policy makers incoherently shift between moral economic justifications depending on whether they are talking about the lender or borrower; or the debts held by the public or private household. This incoherence is how political and economic elites normalise the ‘privatizing gains and socialising loses’ required to sustain European financialisation.
The moral economy of the lender is articulated in terms of ‘risk management’ – whereby profit is the reward for managing risks. Before financialisation was wholly integrated into the European project there were usury laws that enshrined principles of responsible lending, explicitly outlawing the use of interest rates for rent-seeking and profiteering. The Ordoliberal edict ‘you must repay your debts’ became common sense morality in the 20th century when creditors could not engage in usury and debtors must repay. Today that moral responsibility expected of lenders has vanished, and not by accident, this is a clear expression of the power of finance at the heart of the European project.
Greece’s big four banks were fully integrated into the European common market project and as such engaged in the same lending and borrowing behaviours as all European banks. When the credit crunch hit and the questions of how much ‘bad debt’ or ‘toxic assets’ (linked to bad debts) there were in across the global banking system, the European banks were hit hard. It turns out German and French banks were massively over-exposed and suffered from severe liquidity and solvency problems, exactly like the Greek Banks.
When the Troika (European Commission, European Central Bank and International Monetary Fund) organised a bailout it did so for Greece’s main creditors – the German and French banks. At this time private bank debt became public debt, this is now called the ‘Troika’s original sin’ because Europe’s biggest insolvent banks were ultimately bailed out at the cost of Greece’s economy.
A moral economy that permits private banks to create money by issuing debt contracts, leads to over lending. When governments and global institutions bailout the inevitable bad debts created by over lending, they absolve creditors from taking responsibility for bad lending practices. Even economists acknowledge that bailouts create a ‘moral hazard’ – saving someone from the full consequences of their actions, emboldens them to do it again. The sustained program of public money being used to scrub European bank’s balance sheets clean from their bad debts – the long term refinancing operation (LTRO), the ECB guarantee to do ‘whatever it takes’ and now a Quantitative Easing programme – clearly show that banks bad debts are treated differently than every other sector of the economy and society.
What we need to consider is that when the financial system is underwritten by unqualified guarantees by national, regional and global institutions then all debt is both public and private –at the same time.
Austerity Futures
The same shifting moral economies of debt are repackaged in the political case for forced Austerity in Europe, namely by politically conflating the obligation to repay as the same for the public and private households. Conflating the liberal notion of the public (government and central bank) and the private (households and firms) household allows political elites to regularly evoke the household budget as an organising metaphor of Austerity . As such cuts are explained as a natural response to years of profligacy, sound household management means collectively curtailing of state spending to restore sound public finances. In reality the moral economy of Austerity is a political process of using the state to ensure that the public household make cuts to expenditure in order to pay for the publically-funded bailouts of private banks.
Forced Austerity is about ensuring the citizens of Greece (and all EU member states) must continue to mop up the costs of flawed banking business model with substantial public subsidies. In Greece households must accept cuts in income transfers (pensions), state services (health and education) and privatization of state assets (ports and land) in order to meet its repayment obligation to the Troika. Those that must pay for the banking crisis are absolutely not those that caused it.
Europe is at a moral impasse. Greek voters were asked in June this year whether they accepted the bailout terms offered their nation, to which 61 per cent of the populous rejected the offer. Despite this decisive blow to the troika, the conditions set, including drastic cuts and privatisation, will be carried out by the Syriza government and the leader of the ‘No’ campaign – Alexis Tspiras.
Debt Cancellation as an alternative moral economy
The financial reality is that Greece cannot pay back the debts it owes. Not being able to pay is morally very different than not wanting to pay, an important distinction that policy elites remain silent about.
Calls for Debt Cancellation in Greece, based on the Hellenic Parliament public debt audit, offer an alternative moral economy to forced Austerity. Debt cancellation would mean creditors would have to take a loss on their over-lending practices. This act would trigger another ‘crisis’ in European financial markets; but this is fair because it was always a crisis of the European financialised banking business model. It is morally just that those that cause financial crisis pay for it.
However, proposals for debt cancellation have are summarily dismissed as unworkable. Explicitly evoking moral philosophy, policy makers argue that debt cancellation creates a ‘Moral Hazard’ – the very same moral hazard it creates when the banks are bailed out. Except the structural economic crisis faced in Europe is caused not over-borrowing its caused by over-lending and the over-valuation of the assets bought with those loans.
Conversely the case for debt cancellation argues that eliminating large parts of the Greek sovereign debt and creating new terms of payment will serve to rebuild the Greek national economy and revitalise the Europe. The prospects of debt cancellation remain politically toxic because they explicitly subvert the current moral order: bank debts are bailed out while sovereign and household debts must be paid.
Johnna Montgomerie is lecturer in economics in the Department of Politics at Goldsmiths, University of London.
Image: http://underclassrising.net/ CC-BY 2.0